High-end residential property bubble likely?

Cando Group’s Group Director/CEO Ravi Abeysuriya

A section of the audience at the Real Estate Conference

By Himal Kotelawala

Colombo high-end residential property has experienced a boom and could become a bubble according to available research, Group Director/CEO of Cando Group Ravi Abeysuriya said.

Speaking at the second annual Real Estate Conference organised by Lamudi Lanka Ltd. on Wednesday, Abeysuriya warned that there could be an oversupply of semi-luxury / luxury apartments by 2020 due to demand not being able to keep up with planned supply.

A majority of high end properties are bought by investors for rental yield and with the hope to sell at a higher price and not by end users, he said.

“At prices of around $ 300 per sq. ft. high end apartment investors seek rental yields of 5 to 6%. 7 million of sq. ft. of property is to hit the Colombo market by 2019. With increasing disposable incomes, demand for ‘spend the day’ large shopping mall type retail space is expected to pick up,” he said, presenting his findings.

Abeysuriya identified six key areas that present a challenge to those looking to invest in real estate – namely, heterogeneity, lack of transparency and price discovery mechanisms, Illiquidity and the need to sell the entire property to generate liquidity, large per unit value, the requirement of active property management and high transaction costs.

The real-estate sector is amongst one of the key drivers for many economies and constitutes an important contributor to national GDP, a source of revenue generator for governments and a large employment provider, he pointed out.

According to Abeysuriya, real estate is an important asset class to include in an investment portfolio to benefit from diversification and generate wealth, and currently, the demand is outpacing supply of middle class housing.

“Rapid urbanisation has led to an appreciation of land value in areas around Colombo putting more pressure on horizontal housing. Vertical living close to Colombo has thus become a sensible housing option in Sri Lanka with the roads becoming severely congested and with both partners working. The increase in per capita incomes has resulted in the migration of many from the lower middle class to the upper middle class,” he noted in his presentation.

If there is a housing oversupply, his notes went to say, strict policies on the investment and development of residential house market could be imposed by the Government, and many developers and investors will have to turn their attention to alternative sources of funding. 

“More innovative, financing options of commercial real estate have not been used in Sri Lanka. Soon we will see some new financing options such as REITs and CMBs becoming available for commercial real estate developers.”

REITs, or Real Estate Investment Trusts, have been created in many countries to securitize real estate investments. According to Abeysuriya, REITs particularly provide retail investors with an avenue to gain entry into segments of the real estate market that they would not otherwise have been able to, similar to stocks. REITs, he notes, are tradable on a stock exchange making it easier to buy and sell a REIT compared to buying and selling physical property.

“Further, REITs provide liquidity to real estate investments and transparent price discovery through active trading.”

Abeysuriya pointed out that RTIs could provide stability to the whole financial system, particularly during the downturn of the business cycles and even help prevent real estate bubbles.

“People will not invest in real estate purely to sell at a higher price,” he said.

CMBs, or Commercial Mortgage-Backed Securities, meanwhile, provide more efficient, low cost and diversified financing options, and according to Abeysuriya, spread the risk of banks over exposure to the real estate market.

They also transfers illiquid real estate asset to more liquid and tradable asset and can be a good method to deal with non-preforming assets of banks, he noted.

“CMBs can help banks to transfer long term loans to the real estate industry to securities to improve liquidity of assets,” he said.

Pix by Upul Abayasekara